In this week’s bulletin:

  • Positive corporate results were offset by continuing uncertainty in developed economies
  • US economic data showed similar underlying weaknesses to those of the UK released the previous week
  • The Governor of the Bank of England attacked the banks for their harsh treatment of small businesses
  • The first new UK high street bank for 100 years opened its doors to customers
  • The Government announced plans to scrap compulsory retirement at age 65

Big Business starts to leave the economy behind
News and data last week continued to fuel the divergence between the outlook for big business and the developed economies as well as offer opportunities for both the austerity mongers and stimulus seekers to strengthen their arguments. A number of leading global companies reported strong second-quarter figures to boost first-half results, although global equity markets remained fairly neutral as uncertain economic data dampened enthusiasm.

In the UK, British Gas led the charge by reporting first-half profits up 98% over the same period last year. Although not quite in the same league, in terms of growth, BAE Systems, Rolls-Royce, BSkyB, Centrica and BAT all raised dividends on the back of good results. Astra Zeneca reported it would convert increased profits into an increased share buy-back. Even as the profits kept rolling in, and the previous week’s positive GDP data was digested, the UK’s FTSE 100 lost ground against the previous week’s close, down by 1% (source: Lipper). In the US, the Federal Reserve Board’s survey of business conditions noted corporate earnings to be up more than 20% in the second quarter. Both FedEx and UPS, whose revenues depend on transporting goods, reported healthy increases in shipping profits. Technology companies such as Apple, Intel and Microsoft lead the way on profits and many companies upped dividends. Again markets offset positive corporate news with weak economic data and ended the week neutral. The S&P 500 closed down 0.09% for the week and the Dow Jones Industrial Average was up 0.4% for the week.

On the back of increased profitability, Bloomberg reported that global mergers and acquisitions activity has seen a surge with a 10% increase over the first seven months of 2009, at over US$1 trillion, which may begin to boost stock market returns in the latter part of the year. The pattern of robust profits and dividends is being replicated across the globe and may offer excellent opportunities for investors seeking investment in quality companies at reasonable prices even after stock markets have strengthened over the last 15 months.

However, the detailed picture may not be so rosy when considering the benefits to the developed local economies in particular. Much of the increased profitability being seen can be attributed to the strength of corporate streamlining which has been taking place over the last couple of years. For most, sales growth has been negligible or non-existent; however, profits have been growing comfortably. Increased efficiency from outsourced production to low labour cost economies, squeezing profit levels of suppliers, job losses and preferring temporary staff or part-time employees to permanent staff along with relatively modest capital investment, has been reaping rewards.

What price profits for the economic recovery?
Whilst figures released on Friday showed the US economy grew again in the second quarter by 2.4%, this was down from the previous quarter’s 3.7%. Interestingly, when measured in the same way as the Office for National Statistics (ONS) interprets UK data, the growth was only 0.6%, compared to 1.1% for the UK. Similar to in the UK the previous week, the recent US recession was even deeper than previously estimated according to the US Commerce Department’s annual revisions, reflecting bigger slumps in consumer spending and housing than originally calculated. The world’s largest economy shrank 4.1% from the fourth quarter of 2007 to the second quarter of 2009, compared with the 3.7% drop previously on the books, the report showed. Deeper analysis of the US economic data revealed a number of similarities to the UK with employment figures being supported by part-time jobs rather than full time, house prices and the housing market showing little sign of life and consumer confidence continuing to waver.

In fact, the confidence of the UK consumer was dealt a further blow by a string of negative outlooks on the UK housing market from the Land Registry, National Institute of Economic and Social Research (NIESR), Nationwide and Halifax. Overvalued properties and slumping loan approvals are not expected to be helped by depressed outlooks for household income and indebted Britons attempting to reduce borrowings.

On a positive note, Goldman Sachs’ economists, who have close links with the new Chancellor’s advisors, according to The Times, are upbeat about the global economy and the ability of the UK economy to grow in the face of tax rises and austerity measures. Their global forecasts were supported by Baltic Dry Index data showing recent rises continued in freight rates for shipping dry commodities. Economists who use this as a lead indicator for the global economy noted its recent sharp falls had reversed and it was 16% up from its lows, although still below its Spring peak. However, increased movement of goods does not necessarily translate into economic recovery, especially for economies deemed to be consumer and services led.

It has to be noted that most global economic growth predictions are still heavily reliant on the emerging economies to bolster somewhat weaker figures being contributed by developed economies. The Times’ reporting of the NIESR’s revised findings, that at current rates of growth China will overtake America as the world’s largest economy in only nine years, only served to underline the situation. China’s GDP is expected to grow by 11% this year and based on currency adjusted GDP they have already overtaken Japan for second place. In both the UK and the US, opinions are divided on whether governments should focus on curbing spending through austerity measures or potentially boosting the economy and creating jobs through further injections of funds. This highlights the continuing fragility of developed nations’ economic recoveries where further quantitative easing is still a very real possibility in contrast to developing economies where fiscal and monetary controls are in full swing to control rampant growth. India’s central bank raised interest rates for the second time this month last week whilst this week the Bank of England Monetary Policy Committee is expected to leave the UK base rate unchanged at 0.5%.

The Governor does his bit for small business
As the outlook for big business appears to be strengthening, Mervyn King, the Governor of the Bank of England, launched a scathing attack on leading banks over his perception of their harsh treatment of small and medium-sized businesses in the UK, and indirectly the impact on the UK economy. Citing the ‘credit drought’ and the banks’ claims that there was a ‘lack of demand’ as not an adequate response, he attacked their disregard for long-standing business relationships in their relentless pursuit of profits to bolster their capital buffers.

Credit conditions have improved this year; however, they have slowed recently. This has been most apparent for small and medium businesses that, if they do gain funding, are being hampered by tough borrowing criteria. For the UK investor, however, this is broadening the opportunities from corporate bond markets. The resolve of many companies to approach the corporate credit markets for borrowing has seen investment opportunities in fundamentally sound, quality companies, through their corporate bonds, increase. With the increasing recognition the senior secured debt sector of the market is attracting, even fledgling and recovering companies are seeing the chance to borrow at reasonable rates by offering good collateral as security.

The British public does its bit for small banks
Even the British public showed their appetite for new competition to the established high street banks when the first new high street lender to open its doors in 100 years, Metro Bank, had potential customers queuing in the streets. The last time customers queued around a bank was in September 2007 when Northern Rock fuelled panic with its financial statements and a run on its banks occurred across the country.

Forced retirement scrapped
If you still have a job, be it full time or part-time, you will no longer be forced to retire at 65. The Government announced this week that since we all enjoy working and that it keeps us active and living longer, that they would abolish compulsory retirement at 65. Don’t be fooled however, as the longer you work, the longer you can contribute towards the upkeep of those who don’t. The dwindling workforce is now required to support the 16% of the population who are over 65, up from 5% in 1901.

As The Times commented on Thursday, this is not an opportunity to defer saving for the day you finally decide gardening is better than office work: ‘The bigger danger is that people see this as an opportunity to put off or save less for retirement, when in fact it is probably the worst thing they can do’.

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